Game Stop Stocks
The price of GameStop’s stocks at the beginning of the year was just under $19 a share. On January 27, it skyrocketed and peaked at over $347 a share. How did this happen? How did a retail location-based company in both the digital age and a global pandemic that has been doing poorly in sales’ stock price grow more than 18 times in a few weeks? It can mostly be attributed to the online, peer-to-peer stock trading community, most notably from Reddit forum r/WallStreetBets, and a mission they took on to hurt hedge funds.
A hedge fund is an organization with usually millions and sometimes even billions of dollars put into it to be traded in the stock market to make its already wealthy investors even richer. A practice they usually partake in is “short selling.” Short selling is a complicated process, but simplified it has two components: someone that short sells is putting money into hoping that a stock price goes down (which is the opposite of a traditional stock investment, when an investor hopes a stock price goes up to be sold for more money than it was bought), and there is an extremely amplified amount of money either lost or gained depending on which way the stock price goes.
Hedge funds (most notably Melvin Capital) had in the past been short selling GameStop’s stocks because it was easy to predict that its price would go down: there was a pandemic, so shoppers wouldn’t be going into stores to buy products, and the video game market has in general been moving into more online-based retail for a few years now, and the pandemic amplified that move. They were hoping that they would eventually complete their short sell once the GameStop stock price went low enough. But, people on r/WallStreetBets began encouraging each other to fight back and create a situation called a “short squeeze.” A short squeeze is when investors who are trying to short sell end up giving up and losing a high amount of money since the stock they were trying to short rises. Why did they want to hurt hedge funds? Hedge funds are in general seen as some extremely wealthy people using unethical and intransparent tactics to just make even more money with little regard for morality or how they could hurt the economy. And, there were also of course just people caught up in the hype.
Enough people were convinced that the week of January 25, average, “regular people” stock traders who made stock trades on their phones from home usually began investing a lot of money into GameStop, and its stock price skyrocketed. Hedge Funds were on track to lose billions of dollars as a result of this grassroots movement. Melvin Capital, the most notable loser, ended up reporting a 53 percent loss in the month of January. Some investors (including both average individuals and even some hedge funds who had decided to invest in the stock rather than short it) ended up making a lot of money since they were some of the first to invest, and they sold their stocks near GameStop’s stock’s peak price. Once enough damage had been done to short sellers, people tried to make some of their investment back by selling, and the stock as of Valentine’s Day has fallen to $52 per share.
So, what can be taken from this situation? Well, a few things.
This story was all over the news, and there were definitely some people who learned more about stocks and Wall Street in general, as both a social and financial institution (I’ll add this as a personal note: a lot of the economic terms and practices that I used/mentioned here I had absolutely no idea what they would have meant before all of this happened, so I know at least I learned a thing or two).
The way that different groups of people reacted was both very interesting and telling of our current economic situation/status. On January 27, when a lot of this news was breaking, there were a lot of very large figures in the Wall Street world and (usually older) economic news commentators giving scolding condemnations of the way that r/WallStreetBets had acted. The mainstream Wall Street world was upset that a grassroots movement that existed for the main purpose of hurting hedge funds that were out to make (much more than) a buck. It was upset that individuals had used “market manipulation” tactics for their own gain (even though hedge funds are notorious for market manipulation as well), and that “the little guy” was trying to elbow a seat at the table of the big casino that most hedge funds see Wall Street as. Usually the Wall Street world is very very anti-regulation so that they don’t have to worry about their shady practices being taken away from them, but there were many Wall Street talking heads calling for regulations to prevent something like this from happening again.
I asked Mayfair economics and eighth grade history teacher Mr. Andre Lopez to comment on this whole ordeal, and he gave some very worthwhile and interesting insight. At first he said he was “a little weirded out because (he’s) not a big fan of market manipulation, no matter if it comes from hedge funds or a bunch of people on Reddit;” he was a bit concerned with how this would affect the market in the long term, since market instability can really have an impact on average people’s assets, pensions, and retirement set-ups. But, he thought about it, and he came to the conclusion that this was all just “short term noise,” that the market will eventually stabilize causing GameStop’s stock to reflect the company’s actual value, and that “right now we can all have a good laugh at this.” He hopes this doesn’t become a trend though: “the stock market is not a casino in the long-run,” having it fluctuate like this constantly can cause serious damage.